The Financial and Corporate Governance Determinants of Corporate Cash Holdings: Evidence from Egypt

Abodoma, Nihal (2018) The Financial and Corporate Governance Determinants of Corporate Cash Holdings: Evidence from Egypt. Doctoral thesis, Northumbria University.

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Abstract

Corporations hold significant cash balances (Ferreira and Vilela, 2004). There are benefits to holding cash such as decreasing the risk of financial distress and decreasing the reliance on expensive external financing or the fire sale of assets (Opler, Pinkowitz, Stulz and Williamson, 1999). The main cost of holding cash is the opportunity cost of lost returns that could have been generated if the company invested the cash in positive net present value projects (Ferreira and Vilela, 2004). In a cross-country analysis on cash holdings of 45 countries by Dittmar, Mahrt-Smith and Servaes (2003), Egypt has been found to have the highest cash ratio by a large margin. There are three established theories that attempt to explain corporate cash holdings, namely the trade-off, pecking order and agency cost of free cash flow. Al-Najjar (2013) highlights the importance of further academic enquiry into cash holdings in developing economies, particularly from a firm-level corporate governance perspective. The recent political and economic instability, the inherent market risks and the low shareholder protection in Egypt offer an ideal context for investigating the cash holding theories previously examined in developed economies. Therefore, this thesis contributes to the existing literature by analysing the determinants of corporate cash holdings of firms listed on the Egyptian stock market. Ordinary least squares, two-stage least squares and generalized method of moments regression estimators are used on a sample of 157 Egyptian listed firms from 2008-2015. The findings confirm strong evidence of the trade-off theory, agency theory and partial evidence of the pecking order theory. The findings will help managers, boards of directors, investors and policy makers understand the reasons behind cash hoarding in Egypt. This research will help improve cash management in Egypt and hence will increase shareholder wealth, attract more investors to the market and thus contribute to the improvement of the Egyptian economy.

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